Metrics That Matter: Sales Efficiency
metrics to measure if SaaS growth is efficient for the long run
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Understanding sales efficiency as a SaaS investor
One of the most vital aspects of a SaaS business is its sales!
As the old saying goes “you have to spend money to make money”, SaaS sales is no exception.
Sales Efficiency is the amount of new revenue generated for every dollar invested in selling and promoting
As an investor ensuring that a SaaS co has (or will have in the near future) sales efficiency is critical for valuing an investment. Below are several related metrics that can be analyzed to help give a better picture of sales efficiency:
CAC (Customer Acquisition Cost): CAC encompasses all the sales and marketing expenses that a company has to incur in order to gain new customers.
CAC is the baseline metric that is calculated to ensure sales efficiency. This figure is worthless if not analyzed against other metrics which will give a better understanding of sales efficiency. This will be touched upon later in this section.
Note: Some investors choose to use the sales and marketing expense in a preceding period to allow for a more accurate figure. The discrepancy in calculation periods is used as it takes a certain amount of time for S&M to materialize into new customers. Depending on the length of the sales cycle this lag would be longer or shorter (SMB v.s. Enterprise Software).
New ACV (Annual Contract Value) vs CAC: Ideally New ACV is greater than CAC, meaning that customer acquisition costs less than the first year of revenue generated from that customer. In many cases, this ratio may be less than 1 for the first year of a contract, given that incentives may be offered to new customers such as free trials and price discounts.
CAC Payback: This ratio is used to determine how many months it takes for a customer to produce enough gross profits to pay back its CAC.
A high figure is an indication that a company is spending too much on acquiring its customers. This figure for smaller software businesses may be skewed as they are not operating at scale, which provides a challenging task for early-stage SaaS investors.
Magic Number: The SaaS Magic Number is a widely used formula to measure sales efficiency.
Note: Some investors take their own approach to calculate the magic number, to standardize how sales are valued, as seen below;
Interested in learning more about SaaS sales efficiency?? Make sure to check out the following below 👇
📚 How to measure SaaS sales efficiency
📚 Why Sales Efficiency is Key for SaaS Businesses
📚 Valuing Platform Companies vs. Add-Ons: The New Art of Negotiating
What We’re Reading and Listening To…
📚 Strategies for Customer Retention
📚 The Rise of Private Equity in SaaS: A Gift to Founders
News from the Industry: deals, deals, and more deals 💰
Pendo Announces $110 Million Secondary Investment Led by Thoma Bravo
PE-backed Confluence to acquire CSS
Eugene software maker HighLevel snags $60M private equity investment
Favorites from the Ecosystem
Investors👇…..
Founders👇…..
Operators👇….
Good Laugh👇….
About Bloom Equity Partners
Bloom Equity Partners is a lower mid-market software-focused private equity firm, leveraging deep operational and commercial experience to create enduring market value for the benefit of our investors, founders, and their companies.
End Note
Thanks for joining us for another edition of the weekly bloom.
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